Excess capacity and shrinking demand from primary insurers have created “sustained pressure on reinsurance pricing and erosion of terms and conditions”, according to ratings agency Moody’s.

Giving the industry a negative outlook for the next year, MD Simon Harris says reserve releases and benign catastrophe losses have obscured the full extent of earnings deterioration.

Although reinsurers are taking steps to reposition – including mergers and acquisitions (M&A) and innovation in products and markets – this exposes them to execution risk, which can be significant. 

Insurance M&A activity reached record levels this year, and Moody’s expects the trend to continue, driven by regulatory change and the need for scale.

In the primary market, Moody’s expects modest growth for property and casualty (P&C) insurers and strong growth in emerging markets.

“For P&C, we expect premiums will grow in line with economic growth in advanced economies, and faster in emerging economies based on rising penetration rates, even where economic growth is slowing,” Mr Harris said.

Moody’s expects the global economy to continue recovering, while low interest rates remain a key credit risk.

“For P&C insurers, a key sector strength remains the mandatory nature of major lines such as auto, home and commercial property,” Mr Harris said.

Moody’s notes P&C insurers generally maintain sound balance sheets, with quality investments, adequate reserves and good capitalisation, contributing to a stable outlook for the industry. 

Key challenges for the industry are natural and man-made catastrophes, and pricing/reserving for long-tail lines.